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Independent directors, in demand among Indian corporates on shortage of qualified individuals, might become even harder to find, say experts.
The consultative paper on review of corporate governance norms in India released by the Securities and Exchange Board of India (Sebi) has proposed independent directors not be entitled to other remuneration, such as employee stock options (Esops), and called for limiting the number of companies on which such directors can be on board to ten.
Sebi has made these proposals in tandem with the proposed Companies Bill. According to the Bill, independent directors wouldn’t be entitled to any remuneration other than sitting fees, reimbursement of expenses for participation in board meetings, as well as other meetings, and profit-related commission, as may be approved by the members.
Anandorup Ghose, head (executive compensation & governance), Aon Hewitt, said, “Perhaps, we are deviating from global standards, in terms of compensation for independent directors. Globally, at least 25 per cent of the compensation for most directors is allocated to stock-based compensation.”
He added since the pool of independent directors in India was low, the new regulations might make it more difficult for companies to recruit them.
“Since there is a proposal that one directors cannot serve in more than 10 companies, it would lead to a crunch in the availability of such qualified independent directors for companies,” he said.
Though the Companies Act allows up to 15 directorships in public companies, in its paper, Sebi said listed companies demanded a much greater degree of commitment from independent directors, including attending at least four board meetings, as well as meetings of one or more of the committees in a year.
“According to the voluntary guidelines issued by the Ministry of Corporate Affairs, the maximum number of public companies in which an individual may serve as an independent director should be restricted to seven. It needs to be examined whether to restrict the number of independent directorships,” Sebi said in the consultative paper.
Senior corporate lawyer H P Ranina said though the Sebi proposals were welcome, there should be a stringent procedure to select independent directors. “Sebi should have a panel of independent directors, based on integrity, and there should be a provision that all listed companies should have at least half their independent directors from this panel,” he said, adding this would ensure good independent directors came on board, especially in the audit committees of listed companies in India.
Industry experts said if the proposals were implemented, while large companies would be able to attract suitable individuals as independent directors, smaller companies wouldn’t be able to do so.
“This sounds challenging, especially for small- and medium-sized companies, since these wouldn’t be able to attract people using mechanisms like Esops,” said the chief executive officer of a human resource consulting firm.Samir K Barua, director of Indian Institute of Management-Ahmedabad and an independent director on the board of Oil and Natural Gas Corporation, said the number of qualified independent directors in India was low.
“It is going to be difficult for companies to get such individuals on board, taking into account the responsibilities given to independent directors and the fact that they are liable for any fraud detected,” he said.
The remuneration for independent directors should be adequate, not excessive, he added.
Industry entities said the Sebi proposal would mean individuals who saw an independent director’s job as a business, would no longer be able to so.
Prithvi Haldea, chairman and managing director of Prime Database, said, “The Sebi proposals would impact people whose business is to become independent directors and treat this as a profession.”